Market rallies, but analysts watch for proof

It managed to do it on Monday after a soft start to the week. The S&P/ASX 200 stayed convincingly above the 5300 level as shares shook off negative leads and weaker manufacturing news from China. It needs to remain above the 5288 level on a technical basis, according to Rivkin analyst Oliver Gordon, to prove the recent market action which saw it rally to a new five-year high of 5462 marked the upper boundary of a consolidation pattern.

Although there has since been a 3.2 per cent retracement during March, says Mr Gordon, this decline has been shallow enough for the index to retest the prior breakout level, with previous resistance now becoming a support level. Should the current decline push any deeper, however, momentum would shift back to the downside, putting at risk a move back towards major support.

CMC Markets analyst Ric Spooner said on Monday that the fact the ASX 200 index has fallen away from the 5460 level for a second time creates two potential scenarios from a big-picture charting point of view.

The first is that the index is in a large triangle-style pattern, with resistance around 5460 and support around 5080. This scenario, says Mr Spooner, would be consistent with current full valuations and an outlook for moderate ­economic growth. Under this scenario, a return to the 5080 support level from current levels is a prospect.

The second scenario is that the index is making a minor correction of the last rally. It is currently sitting at around the 38.2 per cent Fibonacci retracement around 5300. A deeper correction might see it retreat towards the 200-day moving average and 61.8 per cent retracement around 5200.

Related Quotes

Company Profile

Either way, Mr Spooner says any pullback under this scenario would finish well above the 5080 support, launching a new rally that should move well past the recent 5460 high.

ANZ, National banks catch up

As far as market action on Monday was concerned, major banks
ANZ
and
National
played catch-up over their peers. The market’s start performer was specialty retailer
Kathmandu Holdings
, which enjoyed a double-digit gain following its 10 per cent profit gains news.These gains came despite a currency drag from a lower Australian dollar, as 15 per cent sales growth in Australia offset 5.6 per cent growth in New Zealand.

For traders looking for derivative plays involving exchange-traded options, Ord Minnett senior adviser Wai-Yee Chen suggested scouting for opportunities in stocks that have been sold down recently post-dividend. In this category, she felt, were such stocks as
BHP Billiton
,
Rio Tinto
and
Wesfarmers
.

The Wesfarmers share price, says Chen, has been coming off and is back to its support level of around $41.50. Investors who are prepared to pick up the stock at a lower price than this and put themselves in position for the next Wesfarmers dividend might consider a put selling.

The strategy involves selling the July expiry $41.01 put for about $1.20 each. For the sale of each contract, investors will be required to reserve cash of $3981 to be ready to purchase 100 WES if its price closes below $41.01 on the July 24 expiry.

If assigned to purchase shares, investors will be in a position to be entitled for the August dividend, which could be increased to $1.15 per share, or 2.9 per cent on the lowered entry price. This strategy provides investors with the potential for a lower entry price while reserving cash in the bank until the dividend.